Last Updated on March 16, 2023 by Prakash Kolli
As the market continue to hit new all-time highs, less and less stocks are attractive in today’s market environment. In my last post, we talked about Altria Group (MO) – A Dividend King to Own. Today’s post, we will talk about Altria’s spin-off brother Philip Morris International Inc. (PM). Altria focuses sales in the USA and Philip Morris focuses sales internationally.
Philip Morris International Inc. (PM) Swiss-American multinational cigarette and tobacco manufacturing company, with products sold in over 180 countries. The most recognized and best-selling product of the company is Marlboro. The company is often referred to as one of the companies comprising “Big Tobacco”.
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Dividend Analysis for Philip Morris
Philip Morris is up over 21% year to date as of this writing. The stock has had a great run for the year, and I think it still has room for more upside potential. The Company is now transforming their business model amid the rapid rise in the popularity of smoke-free products.
We will now look at Philip Morris stock dividend history, its growth, and yield. We will then determine if it’s still a good buy at current prices.
Philip Morris has been growing its dividend for 13 years since its spin-off from Altria Group in 2008 making the stock a Dividend Contender. In the last 13 years, Philip Morris stock has an average dividend growth rate of 8.5%. I love it when a company grows its dividend higher than the rate of inflation as this will provide me with buying power for years to come. Philip Morris’s past 5-year dividend growth average is 3.25%, much lower than its ten-year average, which is very concerning though.
So, the dividend growth rate has slowed down compared to its first 13-year average. This is concerning as a dividend growth investor. As a dividend growth investor, we would like to see companies continue to grow its dividend faster than inflation. A dividend growth rate average of only 3.25% a year is a little better than the rate of inflation.
Something significant to note is that Philip Morris stock continued to pay its dividend during the most challenging period in the last 100 years for many companies. Most businesses and industrials were cutting or suspending their dividends payments last year during the COVID-19 pandemic; Philip Morris stock continued to pay out its dividend and in fact the company increased it. That is very impressive. That tells me everything I need to know about the management focus on the dividend policy and dividend safety.
The Company has a hefty dividend yield of 4.8% as of this writing. This is an excellent starting yield for those income-driven investors—especially those investors who are leaving the bond market looking for higher yields. Income-driven investors may want a 4.5% yield or higher. So, Philip Morris meets that criteria easily.
Philip Morris’s current dividend yield is about 35 basis points higher than its own 5-year average dividend yield of 4.44%. I like to look at this metric because it gives me a good idea if a company that I am researching is undervalued or overvalued based on the current yield and 5-year average yield. Price and yield correlate with one another. If the price goes higher, then the yield goes lower. Vice versa as well.
Is the dividend safe? We should always ask this question if we are looking for an undervalued dividend growth stock to invest in. Sometimes undervalued dividend stocks can present us with a “value trap,” and the stock price can continue to head lower.
This is why it is essential to look at the dividend payout based on earnings and free cash flow (FCF). Analysts predict that Philip Morris will earn $6.10 per share for the fiscal year (FY)2021. Analysts are pretty accurate when predicting Philip Morris futures earnings. Philip Morris is expected to pay out $4.80 per share in dividend for the entire year. Using the dividend payment gives us a payout ratio of 79% based on earnings. Having a 78% dividend coverage with a dividend yield of over 4.5% gets me very excited. On a free cash flow basis, Philip Morris has a dividend payout ratio of 78%. Thus, the dividend is decently covered in both earnings and free cash flow.
On another note, capital expenditures have been decreasing for the past few years. The Company spent $1,436 million in 2018 and spent $600 million last year. All while increasing free cash flow each year.
Philip Morris Revenue and Earnings Growth / Balance Sheet Strength
This section will look at how well Philip Morris has grown earnings and revenue throughout the years. When evaluating a company, these two metrics are at the top of my list to consider. Without revenue growth, a company can’t have sustainable earnings growth and cannot continue paying out a rising dividend.
For the past ten years, Philip Morris has revenue that has been decreasing at Compound Annual Growth Rate (CAGR) of (-0.9%). The decrease in revenue has to do with currency exchanges as the Company makes it money internationally then coverts it’s to US dollars. Net income also decreased during this ten year period at a rate of (-0.7%).
Earnings, however, have seen a much better growth rate when compared to revenue and net income. Earnings per share has grown 3.3% CAGR annually for the past ten years. And over the past five-year, EPS has a CAGR of 3.7%. This past few years of earning growth are also in line with what I mention on the dividend growth front.
Last year’s EPS was down from $5.19 per share in 2019 to $5.17 per share for 2020, a modest decrease. Considering the challenging year because of the COVID-19 pandemic, a flat year is pretty good. Also, analysts expect Philip Morris to make $6.10 per share for the fiscal year 2021, which would be a 18% increase compared to 2020.
Something of concerned to me is the challenges and the decline of the cigarette market. There is a big push to get rid of cigarettes because of its addictive nature and resulting health issues. However, with the rise and popularity of smoke-free products as an alternative to smoking, combined products is one of the critical trends in the industry. According to analysts, the global heat-not-burn tobacco products market size was estimated at $16.75 billion in 2020 and expected to reach $19.33 billion in 2021, at a CAGR 15.73% from 2020 to 2026 to reach $40.27 billion by 2026. This will help drive future earnings growth for Philip Morris. The company is also expanding outside of cigarettes and tobacco products and has recently taken a stake in Vectura, the British asthma inhaler company.
Also, the Company has a solid balance sheet. Total debt has been flat to declining for the past several years as seen the chart below from Portfolio Insight*. Currently, Philip Morris has an S&P credit rating of A, which is investment grade. The Company does have a good debt to equity ratio. However, the Company has a negative debt to equity ratio of (-5.4), which means the Company has an interest rate on its debts that are greater than the return on investment. But the interest coverage ratio is 16.6X, which is very good. the negative debt to equity ratio is something that I do not like, but not too concerned right now because of the high-quality Company that Philp Morris is.
Philip Morris Valuation
One of the valuation metrics that I like to look for is the dividend yield compared to the past few years’ histories. I also want to look for a lower P/E based on the past 5-year or 10-year average. Furthermore, I like to use the Dividend Discount Model (DDM). I use a DDM analysis because a business is ultimately equal to the sum of all the future cash flow that that business can provide.
Let’s first look at the P/E ratio. Philip Morris has a P/E ratio of 16.3X based on Fiscal Year (FY)2021 earnings of $6.10 per share. The P/E multiple very low compared to the past 5-year P/E average of 19.6. If Philip Morris were to vert back to a P/E of 19.6, we would obtain a price of $119.56 per share.
Now let’s look at the dividend yield. Like I mentioned, the dividend yield currently is 4.8%. Looking at Philip Morris own 5-year dividend yield average of 4.44%, there is a huge potential upside. For example, if Philip Morris were to return to its dividend yield 5-year average, the price target would be $108.11.
The last item I like to look at to determine a fair price is the DDM analysis. I factored in a 9% discount rate and a long-term dividend growth rate of 3%. I use a 9% discount rate because of the high current dividend yield. The projected dividend growth rate is lower than its 10-year average but in line with its past 5-year average. This gives us a fair price target of $82.40 per share.
If we average the three fair price targets of $119.56, $108.11, and $82.40, we obtain a reasonable, fair price of $103.26 per share. This gives Philip Morris a possible upside of 4.08% from the current price of $99.21.
Conclusion Philip Morris – A Dividend Stock to Consider
Philip Morris is a high-margin business with durable brand competitive advantages. While there’s a decline in its cigarette market, that market remains high in free cash flow. With a 4.8% yield, more than 10 consecutive years of dividend raises, a reasonable payout ratio, and the potential that shares at 4% undervalued, Philip Morris is an excellent idea and stock for dividend growth investors looking for yield and income.
Disclosure: Felix is long PM
You can also read Altria Group (MO) – A Dividend King to Own by the same author.
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My name is Felix Martinez, and I am a Dividend Growth Investor who has invested in dividend growth stocks for the past seven years. I also run a YouTube channel called FiscalVoyage. I have written for SeekingAlpha.com as well as SureDividend.com. I focus on undervalued dividend growth stocks with capital return and dividend income potential. Make sure to follow me on my YouTube Channel. See you there.